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Economic Bias of Weather Forecasting: A Spatial Modeling Approach

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Abstract

The value of accurate weather forecast information is substantial. In this paper we examine competition among forecast providers and its implications for the quality of forecasts. A simple economic model shows that an economic bias geographical inequality in forecast accuracy arises due to the extent of the market. Using the unique data on daily high temperature forecasts for 704 U.S. cities, we find that forecast accuracy increases with population and income. Furthermore, the economic bias gets larger when the day of forecasting is closer to the target day; i.e. when people are more concerned about the quality of forecasts. The results hold even after we control for location-specific heterogeneity and difficulty of forecasting.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_12eco.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2008_12.

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Length: 43 pages
Date of creation: 22 Oct 2008
Date of revision:
Handle: RePEc:dkn:econwp:eco_2008_12

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Related research

Keywords: Weather Forecasting; Extent of the Market; Forecast Verification; Accuracy; Bias; Spatial Autoregressive Model;

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  1. Campbell, Sean D. & Diebold, Francis X., 2004. "Weather forecasting for weather derivatives," CFS Working Paper Series, Center for Financial Studies (CFS) 2004/10, Center for Financial Studies (CFS).
  2. Lung-Fei Lee, 2004. "Asymptotic Distributions of Quasi-Maximum Likelihood Estimators for Spatial Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 72(6), pages 1899-1925, November.
  3. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 59, pages 185.
  4. Craft, Erik D., 1999. "Private Weather Organizations and the Founding of the United States Weather Bureau," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 59(04), pages 1063-1071, December.
  5. Alberto F. Ades & Edward L. Glaeser, 1999. "Evidence On Growth, Increasing Returns, And The Extent Of The Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 1025-1045, August.
  6. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 21-40, February.
  7. Roll, Richard, 1984. "Orange Juice and Weather," American Economic Review, American Economic Association, American Economic Association, vol. 74(5), pages 861-80, December.
  8. Weitzman, Martin L, 1994. "Monopolistic Competition with Endogenous Specialization," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(1), pages 45-56, January.
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